Answer Happy

Additional problem 1 You are interested in estimating the demand curve (B1) for a given product. You know that quantity demanded Qd and quantity supplied Q, are both functions of prices: 2 Qa= Bo + BiP+u, B1 <0 Qs = ao + aP + €, a > 0 However, what we observe in data are equilibrium quantities: Qi:=Qd = Q. (1) i. Show that we don't have enough information to estimate B1 You propose to use margical cost MC as an instrument that shifts quantity supplied independently of prices and allows to learn about the demand curve: Qs = ao + Q1P+Q2MC + € ii. Assuming that equilibrium equation (1) holds, show that one can recover an estimate of B1 (the demand curve) from the standard IV estimator: B = Cov(Qi, MC;) Cov(Pi, MC;)
Additional problem 1 You are interested in estimating the demand curve (B1) for a given product. You know that quantity demanded Qd and quantity supplied Q, are both functions of prices: 2 Qa= Bo + BiP+u, B1 <0 Qs = ao + aP + €, a > 0 However, what we observe in data are equilibrium quantities: Qi:=Qd = Q. (1) i. Show that we don't have enough information to estimate B1 You propose to use margical cost MC as an instrument that shifts quantity supplied independently of prices and allows to learn about the demand curve: Qs = ao + Q1P+Q2MC + € ii. Assuming that equilibrium equation (1) holds, show that one can recover an estimate of B1 (the demand curve) from the standard IV estimator: B = Cov(Qi, MC;) Cov(Pi, MC;)